The latest data show that the job market continues to improve, slowly. Payrolls have expanded at a moderate average monthly rate of 189,000 over the past 12 months. Assuming no government shutdown or debt ceiling crisis in the fall (please), most economists predict more of the same. The median forecast of economists surveyed by Bloomberg call for an average monthly gain of 185,000 in the fourth quarter of this year and 191,000 a month in the first quarter of 2014. All told, the job market is on the mend.
The same cautious optimism doesn’t hold for wages. Employees took home less income in July, with hourly earnings down an average 0.1 percent for the month. Over the past 12 months, hourly earnings are up 1.9 percent (ending in July), essentially flat after taking the 1.8 percent rise in consumer price inflation into account (ending in June). While these figures reflect a subpar job market, they’ve become normal for low-income and middle-income workers. Hourly wages of workers with less than a high school education are down 20.4 percent from 1979 to 2011 (in 2011 dollars), according to the Economic Policy Institute. The Washington (D.C.) think tank calculates that hourly wages for high school-only workers have fallen 4.68 percent and for those with some college, 1.4 percent. Little wonder low-wage fast-food workers are staging protests calling for higher wages in major cities. (For a powerful illustration of the everyday impact of growing income inequality, check out McDonald’s $8.25 Man and $8.75 Million CEO Shows Pay Gap.)
With rare exceptions, just about everybody agrees that the paltry pay gains for the bottom half of society is bad for individuals, for their families, and for economic vitality. What’s different today is the realization that even with the most optimistic job projections and economic growth assumptions, the long-term prospects for genuine improvement in the real incomes of low-wage and moderate-wage workers are bleak. Economists long assumed the wealth generated by productivity growth—doing more with less, the basic building block of higher living standards—would translate into better wages for all workers, not just the well-educated and lucky. Productivity growth and wages rose together from 1948 to 1973. Since then, productivity is up 80.4 percent, while median hourly compensation has risen a mere 10.7 percent, the EPI calculates.
OK, the bottom half of society needs a pay raise. What kind of bold action might best hike worker paychecks? There is no easy answer, no simple solution, but relying on market forces alone won’t do. Markets are amazing social institutions for transmitting information, creating incentives to innovate, and for allocating scarce resources. But markets have faltered at sharing prosperity in recent decades.
How about dusting off an idea promoted by Milton Friedman, the late Nobel laureate, in his 1962 book, Capitalism and Freedom: Institute a negative income tax. Friedman’s basic idea was to get rid of an alphabet of antipoverty programs, such as food stamps, rent subsidies, unemployment insurance, and other “in-kind” transfers. Instead, put cash into the hands of low-income people through a negative income tax.